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 Mortgage Basics Chapter 1: Rent or buy?
 Hundreds of thousands of Americans ask themselves that each year. There's no easy answer.

# How much house can you afford?

Mortgage lenders are chiefly concerned with your ability to repay the mortgage. To determine if you qualify for a loan, they will consider your credit history, your monthly gross income and how much cash you'll be able to accumulate for a down payment. So how much house can you afford? To know that, you need to understand a concept called "debt-to-income ratios."

Debt-to-income ratios
The standard debt-to-income ratios are The housing expense, or front-end ratio and the total debt-to-income, or back-end ratio.

Debt-to-income Ratios

Example
Take a home buyer who makes \$40,000 a year. The maximum amount for monthly mortgage-related payments at 28 percent of gross income would be \$933. (\$40,000 times 0.28 equals \$11,200, and \$11,200 divided by 12 months equals \$933.33.)

Furthermore, the lender says the total debt payments each month should not exceed 36 percent, which comes to \$1,200. (\$40,000 times 0.36 equals \$14,400, and \$14,400 divided by 12 months equals \$1,200.)

 -- Posted: May 1, 2006
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 • Should you buy or rent? • How much house can you afford? • Chapter 1 quiz

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